Guide

Margin vs Markup: The Difference, With Examples

They come from the same sale and they are not the same number. Mixing them up is the quickest way to underprice a product without noticing.

The short version

Both start with profit: the price minus the cost. Markup compares that profit with the cost. Margin compares it with the price.

A product that costs $5 and sells for $10 makes $5 profit. The markup is 100%, because the profit equals the cost. The margin is 50%, because the profit is half of the price.

Why the mix-up costs money

Suppose you want to keep 40% of every sale, and your product costs $12. If you add 40% to the cost you get $16.80. Your profit is $4.80, which is only 28.6% of the price. You planned for 40% and you are keeping under 29%.

To keep a true 40% margin, divide the cost by 0.6. That gives $20.00. The profit is $8.00, and $8.00 is 40% of $20.00.

The two formulas

Price from a markup: cost times (1 plus the markup). A 100% markup on $5 is $5 times 2, or $10.

Price from a margin: cost divided by (1 minus the margin). A 50% margin on $5 is $5 divided by 0.5, or $10.

Which one to use

Use whichever you find easier to set prices with, but judge the result by margin. Selling fees, card fees and advertising are all charged as a share of the selling price, so margin tells you directly how much room you have to pay them.

Common pairs worth remembering: a 25% markup is a 20% margin, a 50% markup is a 33.3% margin, a 100% markup is a 50% margin, and a 200% markup is a 66.7% margin.